A client wants advice about investing for Armdageddon

So a client of mine wants me to give him advice on what he should do with his money in order to prepare for a ‘macro level’ financial collapse that sees all banks collapse (or get nationalised presumably). He thinks it’s going to come from this ‘QE/deflation stuff’.

Obviously I told him that if it gets that bad he best be living on a farm with guns and ammo, but he actually wants some serious investment advice. He threw out a range of things like Treasuries, cash, gold etc.

So I’ve got to give him a serious answer - any suggestions?

I’m thinking a mix of cash under the bed (literally) and gold bullion. Gold does ok in ultra-inflation, cash does ok in deflation (assuming fiat money still stands). The only problems are storage of the cash and bullion.

Bullion and guns. Also make sure your gold coins are in small enough denominations that you can exhange them for goods. When zombies are roaming and you need ammo or gasoline, and all you have is 1oz. rounds, you’re stuck. Maybe keep some silver on hand for transactional ease in a pinch. Equities could all go to zero with a collapse of the legal system, along with bonds. No way to get your cash. So really its hard assets. Land, gold, guns, livestock.

Might I ask what’s his time horizon for this scenario…

He doesn’t know. It’s been on his radar for a while, but taken a while for him to make a formal request for information on how to deal with it. Personally I think he is crazy (despite being a very succesful professional) but I have to give him something.

I’m not sure if the guns 'n ammo thing will be sufficient, though I will explain that a widespread banking collapse really does mean we’re all in survival mode. But outside of buying a farm, some guns, some gold and keeping the rest in cash, what else really could you do to prepare for such an event?

I think your best course of action in this case is to give the guy a few options such as gold, cash buried in the garden etc. But spend 95% of the conversation trying to steer this guy around to a more sensible long term investment solution.

None of us know for sure there isn’t going to be a nuclear war next year, but I am not going to make my investment decisions based on that very small probability. If he is worried about hyper-inflation, then having an allocation to farmland or forestry would be a good choice. It can be a useful diversifier anyway in a balanced portfolio. Given that you are in Aus, there should be a decent amount of local farmland funds to choose from.

10% in farmland and 10% in gold is about as far as I would go. Then have the remaining 80% split between low cost global stock funds and sovereign bonds (maybe throw in some inflation-linked bonds to set him at ease also).

Good one. However, I’d actually invest a decent chunk of the 80% in a volatility derivative of some sort because if we do get close to his scenario being true, vols are going to go through the roof. The point is to make a killing in the runup to that event and cash out in gold.

Oh and by the way, ECB is a relative nobody in this game - if Europe blows up, Japan will go down with it because of its idiosyncratic problems - leaving BoJ with a boat load of worthless assets on its book.

So if he’s really serious and depending on how much premium he’s prepared to pay - buy vol in Japan. If we come anywhere close to a financial armageddon scenario that he envisions, then (I think) Japan will be first and the earthquake it’s collapse causes will be the end of financial system. Even if Japan is relatively shielded, volatility will spike to levels that’ll make the trade worth it.

I hear this sort of rubbish from time to time, and like the OP, I wonder how such successful people can be so crazy. Nonetheless, let’s look at the facts of “investing” in a true Armageddon scenario.

First, if people are living in conditions where the banking system goes down, cash is out, since the Fed will have no control over the collapsed system and no transmission mechanism. People will not want cash if the government has lost control. By the same token, Treasuries won’t hold much value, either, since Treasuries ultimately are exchanged back for cash, and if all banks are gone, they will have dumped their Treasuries that they held in reserve in the pre-closure fire sale, flooding the market with rapidly sinking paper. Even if the Fed wanted to support the price, they couldn’t do this since banks would be the transmission mechanism they would use to do this (think the FOMC’s open market operations). And if the Fed stepped in centrally and said to the public, “don’t worry, the local banks are gone but come on down to one of our district banks and we will buy your Treasuries,” there is still the problem that people might not bite because they know they are getting useless cash – and all this after a time which your client believes that QE, etc. has already destroyed the credibility of the Fed.

By the way, is your client actually holding his securities at an institution which is connected with a bank? How does your client know it will just be banks that are impacted and not the myriad types of other financial institutions? Have you worked out a plan as to how the client can extract the assets should the place where the assets are stored shutter its doors just at a time when the client needs it most?

Also, I’m puzzled when gold is mentioned during these scenarios. If it is a true “head for the hills” disaster scenario the client is preparing for, what good is gold? If it’s like a serious “doomsday prepper” or “Walking Dead” fiasco, the value of gold would effectively be nothing. The most valuable things would be food, water and the means of survival. Even if gold had a value (as people might imagine we would emerge from the disaster one day), imagine the storage costs and practical burden on lugging around and protecting very much more than a few pounds of gold, at most!

On the farmland – sure, if he is buying an actual farm that he plans on living on right away. If your client is in Perth and the farmland is located in Queensland and owned remotely, there is no guarantee that the legal right to ownership would carry weight in a world where the legal system might not have the muscle to enforce such claims.

Guns, ammunition, various types of knives, machetes and other stabbing weapons, light body armor, long-storage-life food (such as MREs, dried and canned food), long-life water containers, extensive first aid kits (including field dressings, blood clotting agents, a collection of various splints, medicines including a wide range of antibiotics and antiseptics) and the construction of a large bunker where all this stuff is stored close to where the client lives would be advised. Most importantly, the bunker should have an outlet garage where a heavily armored, lifted truck or SUV with bulletproofing, run flat all-terrain tires and plenty of reserve gasoline/petrol is stored. However, the client should know that these “investments” are not likely to earn a return, and in fact are very likely to lose value rapidly over time, the longer they are not used.

So the client should be educated in the notion that true doomsday investing carries with it a direct opportunity cost – the opportunity cost of losing the potential return that would be earned by other clients should the doomsday scenario not come to pass.

Talk to him about the risks of timing then maybe suggest a long dated treasury portfolio with an overlay of deep OTM long term options for like 2% of the value. That way you essentially burn ~2% of your returns each year on a gamble but it’s sustainable. I mean, you can buy farmland and have it lose 10% in a year if corn prices drop, but this way you’re limiting loss to the known amount of the options you’ve bought and just keep rolling the strategy. This is basically the “Black Swan” portfolio strategy Taleb advocated. Although now adays I think he’s more focused on identifying investments with optionality underpinning a business model.

Some people would say, “sure but wouldn’t treasuries be screwed too?” Maybe, but first they’d gain value and give you a chance to sell and go to gold before people realized the depth of the problem over maybe a 6 mo to1 year period. Although, if he’s worried about a monetary QE driven disaster with worldwide hyperinflation, then commodities and bullion may be your only protection.

Or just farmland, treasuries, and futures on oil if you want to really commit.

I think Destroyer of Worlds (appropriate name for thread!) makes some good points. If this client is really preparing for some kind of mad max sci-fi scenario where order has totally broken down, then almost any traditional investment strategy, including bonds and gold, is useless.

If you really want to research this, it might be worth investigating day to day life in ISIL and Syria now. It’s hard to imagine a scenario in Australia where life is more f*cked up than that. Do banks still function there? What currency do they use?

I don’t know the answers to those questions by the way. But I imagine having a stockpile of guns and canned food wouldn’t have hurt if you are living in that region.

i agree. DoW has made virtually all the necessary points.

to clarify, the only way to prepare for doomsday is to consume, as in buying depreciable assets, not invest. so investing for doomsday is technically impossible. yes, these depreciable assets (like guns and medical supplies) could see a boost in value in a doomsday scenario, but they will depreciate up until the day everything officially shuts down.

i’d also add good quality booze to the list of items as i would imagine this would be mostly consumed or destroyed during the chaos and would be in high demand during the dog days of doomsday, and would likely increase in value in doomsday and be valuable to the owner if he’s looking for leisure in a world of crap.

Taleb pitched this exact strategy at a local society event a few years back.

yep. i remember 2012 and watching walking dead. so i figure lets hedge our risks.i went to the shootign range on my bday to learn how to shoot. honestly its pretty fun stuff though.

I’d look at my earlier post and talk to him. It’s a great strategy assuming some degree of financial markets still exist. But also keep in mind in an options strategy your counterparties are likely financial institutions. It’s worthwhile to find out exactly how doomsday his scenario is. Are we living in Kevin Costner’s Waterworld or does he just mean the financial system gets crushed majorly by these stimulus efforts but some form of law and order (like iffy, later season quality) continues. I’m not validating either argument, but it makes a difference for how you’d plan and what tools are available.

If he really does think we’re looking at a major apocalypse, maybe its worth buying investing in a bad ass sports car that could be stored in your garage as sort of an off site storage for geographical diversification. If there’s anything I Am Legend taught me, its that in the end times people will still drive pimp rides. Also, remember to start it up occasionally and drive it around for a few hours to keep the oil circulating and the tires from getting flat spots.

Yeah, good points all. I think it is not so much about investing for doomsday as insuring for the possibility. Maybe he takes 5% of his net worth and buys:

  1. weapons and ammo

  2. massive quantities of clean water and non-perishable food

  3. drums of fuel for transport and heating (depending on locale)

  4. liquor (wine and beer take up too much space)

  5. non-light cigarettes (American Spirits or something that really packs a punch and burns a long time), easy to transport and serve as currency in prisons, which is a similar scarcity environment.

  6. Really kick-ass survival kits to keep in bedroom and all family cars. These should include substantial first aid kits, water, MRE, flashlights and heat blanket.

  7. Potentially a shelter, depending how much insurance he/she wants and how large his/her portfolio is.

  8. Generator and solar powered batteries.

  9. As many medicines as he can legally purchase and store. This will likely require refrigeration, but the price of things like insulin would skyrocket in that type of scenario…also, it’s just being a good guy. If you have a lot of medicines that can potentially keep people alive, you are in pretty good shape.

  10. Perhaps most importanly, invest in learning. Knowledge about survival will be more valuable than most of the things listed above.

It is AMAZING! I once suggested we go for clay pigeon shooting for our team outing - got an email from my manager within minutes saying how this was not very becoming of the reputation we wish to establish in front of clients. If only he understood that I was thinking ahead in prep for the armageddon

newsuper,

How important is this client to you? Is he/she relatively easy to get along with otherwise?

I like how the two basic public agreed upon societal scenarios are all-out implosion or nothing happens at all.

I’d suggest to this nutball layering his investments from no-chance of implosion today to zombies are eating ears and limbs off people in the streets of Manhattan. That way he feels comfortable with being wrong yet continues to carry an implied put (perhaps gold being the best put?) on potential monetary impotence.

Odds are something will happen but it won’t be armageddon or monetary backed socialist utopia. Some ideas will fail, others will be fine.

It really depends on the details of the armageddon. There’s fire, flood, earthquakes, and election results.

More seriously, the question is whether it involves war/civil war, revolution against the 1%, or just something like hyper-stagflation but not necessarily a breakdown of law and order. Whether you want water or wood at the end of the world depends on whether the world is ending in fire or flooding.

You should also ask your client how long they’ve been wanting to invest this way. You can lead that into a discussion about what their assets would look like now if they had invested as soon as they had realized that armageddon was coming.

The funny part is that the “if sh!t hits the fan” scenario is probably less likely in the last 20 years than in all of history.

Most people are saying stock up on this and that ; I would bank on belonging to some sort of well thought-out community, where contributions to the group are well established : a sub-group providing agriculture, another providing basic medicine, another providing defense, another providing basic engineering, etc.

Your weapons aren’t going to help you if you catch cholera from failed sewage, your farm won’t help you when people are starving and start looting, etc.

Moral of the story, as romantic as it sounds, the lone wolfs are mostly getting f*cked one way or another in such a scenario.